The proposed Emissions Trading Scheme (ETS) is under intense scrutiny at the moment. Lobbyists, economists and politicians are all pounding their respective beats, and as is usual in these matters, a great deal more heat than light is being shed on the proposed legislation. At the beginning of the week, the government’s climate change leadership forum – the great and the good of the business world – announced that it supported the broad outline of the ETS with some caveats (announcement, Herald), only for Business NZ to promptly withdraw its support. Then the Sustainability Council of NZ published a report [PDF] criticising the way that the ETS transfers revenue from consumers to key industries – especially agriculture – and warned that it wouldn’t do enough to reduce emissions. Not to be outdone, the NZ Institute for Economic Research produced its own report [PDF], warning that the scheme would do little good and cost the economy billions, and advising that we shold do nothing except buy Kyoto compliance on the world market. ACT leader Rodney Hide then announced that “the Government’s ETS is a crock and should be dumped.” There are now rumours that the government is running scared, and might delay implementing the petrol and fuels part of the scheme to avoid frightening consumers in the run up to the election. So, who’s right? Is Rodney’s incisive analysis on the money?
First, it has to be pointed out that the whole point of the emissions trading scheme – or any market-based scheme intended to reduce emissions – is to put a price on those emissions. With a suitable price signal in the market, the economy responds by reducing emissions output. In other words, there has to be a cost. No cost, no action. Economists, in general, prefer the purity of a carbon tax. Set a price, let the market work its wonders. That’s what NZ was going to have, until the government caved in to intense lobbying from business and agriculture. Now we have an emissions trading scheme, much more complex, but much more flexible. Different sectors can be treated differently, big emitters can be bought off with free emissions units, and politics in its rawest form – brute force lobbying and the plaintive cries of special interests can be heard around the land.
In all this, what tends to be forgotten is the bigger goal – doing something about climate change. The context for action in New Zealand is actually very little to do with achieving emissions reductions here. Our emissions are so small in global terms that even a 90 percent cut tomorrow would have no impact on global climate. What makes it important to do something is that we be seen to be playing the game. And what gives the game its edge is the urgency: if climate change happens faster than expected, faster than the IPCC suggested last year, then the policy response in our key markets will have immediate impacts here.
In that context the NZIER report, bruited around the political and media traps as “proving” the ETS will be incredibly expensive, falls at the first hurdle. It explicitly assumes that there is no international action to reduce emissions, so that our ETS is out all on its own, and our exporters are therefore forced to price themselves out of their markets. No matter how good the economics in the rest of the report, that assumption renders it useless as guide to making policy. It does have some redeeming features – the discussion of how free allocations to emitters should be phased out is a useful contribution to the debate (because the detail of how it’s done has a large impact on big emitters). But like the earlier NZI “fast follower” report, it gets the urgency of the international situation and the likely international policy response wrong. Forget the big scary numbers (they’re mostly way out in the future, anyway), if the planet hasn’t started cooperating to reduce emissions by the time Kyoto 2 comes along, a few percentage points off GDP will be the least of our worries. And the NZIER’s suggestion, that we ditch the ETS and buy all the Kyoto credits we need overseas strikes me as delusional. Exporters – including Fonterra – would be crucified by international perception of such cynical inaction.
The Sustainability Council’s report, on the other hand, seems to me be operating in the real world. The authors acknowledge the international context, and “get” the seriousness of the issue in a way the NZIER doesn’t. This is serious, they say. Let’s make it work. It’s a long report (157 pages) and I haven’t gone through it with a fine tooth comb, but it will certainly repay further study.
And Rodney? Stick to the dancing, mate.